SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q/A
Amendment No. 1
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to
______________
Commission File number 333-18295
COLONIAL DOWNS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1826807
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
10515 Colonial Downs Parkway
New Kent, Virginia 23124
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code:
(804) 966-7223
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
Class Outstanding at August 10, 1998
Class A Common Stock, $.01 par value 5,000,000
Class B Common Stock, $.01 par value 2,250,000
<PAGE>
COLONIAL DOWNS HOLDINGS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Earnings (Loss)--
Three and Six Month Periods Ended
June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 8
Part II. Other Information
Item 1. Legal Proceedings 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matter to Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE>
Part I. Financial Information
COLONIAL DOWNS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
----------------- ---------------------
(unaudited)
<S> <C>
Assets
Current assets
Cash and cash equivalents $ 1,629 $ 3,348
Horsemen's deposits 2,762 1,657
Accounts receivable 400 293
Prepaid expenses 558 497
Refundable income taxes 34 218
----------------- ---------------------
Total current assets 5,383 6,013
Property and equipment 62,301 61,275
Less accumulated depreciation and amortization 1,326 660
----------------- ---------------------
Net property and equipment 60,975 60,615
Other
Licensing costs, net of amortization 805 841
Miscellaneous 341 406
----------------- ---------------------
Total other 1,146 1,247
----------------- ---------------------
Total assets $ 67,504 $ 67,875
================= =====================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 4,255 $ 9,276
Accounts payable - arbitration 3,474 2,402
Accrued expenses 1,105 637
Current maturities of long-term debt and capital
lease obligations 15,469 1,373
Deferred revenue 135 195
Purses due horsemen 2,484 1,597
----------------- ---------------------
Total current liabilities 26,922 15,480
Long-term liabilities
Long-term debt and capital lease obligations, net
of current maturities 716 9,890
Notes payable - related parties 5,500 5,500
Other long-term liabilities 240 -
Deferred income taxes 84 84
----------------- ---------------------
Total long-term liabilities 6,540 15,474
Stockholders' equity
Common stock
Class A, $.01 par value, 12,000,000 shares
Authorized; 5,000,000 outstanding 50 50
Class B, $.01 par value, 3,000,000 shares
Authorized; 2,250,000 shares outstanding 22 22
Additional paid in capital 37,842 37,842
Retained earnings (deficit) (3,872) (993)
----------------- ---------------------
Total stockholders' equity 34,042 36,921
----------------- ---------------------
Total liabilities and stockholders' equity $ 67,504 $ 67,875
================= =====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COLONIAL DOWNS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -----------------------------
1998 1997 1998 1997
<S> <C>
Revenues
Pari-mutuel and simulcasting
commissions $ 6,722 $ 4,675 $ 13,167 $ 9,672
Other 1,046 369 1,373 789
------- ------ ------- -------
Total revenues 7,768 5,044 14,540 10,461
------- ------ ------- -------
Operating expenses
Direct operating expenses
Purses, fees and pari-mutuel taxes 3,323 2,245 6,374 4,790
Simulcast and other direct expenses 4,280 1,863 7,402 3,708
Depreciation and amortization 445 105 888 207
------- ------ ------- -------
Total direct operating expenses 8,048 4,213 14,664 8,705
Selling, general and administrative
expenses 1,165 436 1,829 883
------- ------ ------- -------
Total operating expenses 9,213 4,649 16,493 9,588
------- ------ ------- -------
Earnings (loss) from operations (1,445) 395 (1,953) 873
Other income (expense)
Interest expense (492) (46) (957) (84)
Interest income 10 414 31 439
------- ------ ------- -------
Earnings (loss) before income taxes (1,927) 763 (2,879) 1,228
Income taxes - 290 - 326
------- ------ ------- -------
Net earnings (loss) $ (1,927) $ 473 $ (2,879) $ 902
======= ======== ======== =======
Earnings per share data
Basic and diluted earnings per share $ (0.27) $ 0.07 $ (0.40) $ 0.17
======= ======= ======== =======
Weighted average number of shares
Outstanding 7,250 7,250 7,250 5,442
======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COLONIAL DOWNS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
1998 1997
---------------- ----------------
<S> <C>
Operating activities
Net earnings (loss) $ (2,879) $ 902
Adjustments to net earnings (loss)
Depreciation and amortization 888 207
(Increase) in accounts receivable and other assets (106) (598)
Increase in accounts payable 605 822
Increase in accrued expenses and other 409 211
(Decrease) increase in horsemen's deposits and
purses (net) (218) 50
----------------- ----------------
Net cash (used in) provided by operating activities (1,301) 1,594
Investing activities
Purchases of property and equipment (1,025) (19,206)
(Decrease) increase in construction payables (4,316) 2,129
Investment in other assets - (97)
---------------- -----------------
Net cash used in investing activities (5,341) (17,174)
Financing activities
Proceeds from long-term debt and capital leases 5,287 110
Payments on long-term debt and capital leases (364) -
Net proceeds from stock offering - 36,192
Funding of purse account promissory notes - (1,620)
Payments on stockholders' advances and notes payable - (699)
Proceeds from stockholder notes payable - 4,613
---------------- ----------------
Net cash provided by financing activities 4,923 38,596
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (1,719) 23,016
Cash and cash equivalents, beginning of year 3,348 1,380
---------------- ----------------
Cash and cash equivalents, end of period $ 1,629 $ 24,396
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COLONIAL DOWNS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying consolidated financial
statements of Colonial Downs Holdings, Inc. ( the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim reporting, with applicable reporting regulations of the Securities
and Exchange Commission, and present fairly, in all material respects, the
Company's financial position as of June 30, 1998 and the results of
operations and the consolidated cash flows for the three and six month
periods ended June 30, 1998 and 1997. All adjustments are of a normal,
recurring nature. The financial statements do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements and, accordingly, should be
read in conjunction with the consolidated financial statements and related
footnotes included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilutive
effect of securities that could share in earnings of an entity. At June 30,
1998, there was no material dilutive effect on earnings (loss) per share.
2. Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------------ -------------------
<S> <C>
Note payable to a Bank maturing June 2000, with two one year
extensions, bearing interest at a variable rate (8.63% at June 30,
1998), with a $1,000,000 principal payment due in December 1998 and
quarterly principal payments of $500,000 commencing in April 1999,
collateralized by substantially all assets of the Company and
guaranteed by certain shareholders and related parties. $ 10,000 $ 10,000
Convertible subordinated note payable to CD Entertainment, Ltd.,
maturing March 2000, with interest payable quarterly at a rate of
7.25%, collateralized by a second deed of trust on the
racetrack facility. 5,500 5,500
Line of credit facility with a Bank, maturing June 2000, with two one
year extensions, bearing interest at a variable rate (ranging from
8.63% to 8.75% at June 30, 1998), collateralized by substantially all
assets of the Company and guaranteed by certain shareholders and
related parties.
5,000 -
<PAGE>
Note payable to a Bank, maturing August 1999, bearing interest at
prime plus 1%, with monthly principal payments of $15,000,
collateralized by certain fixed assets.
750 840
Note payable to an Insurance Company, maturing October 1998, bearing
interest at 7.30%, with monthly payments of $32,933 including
interest.
98 -
Note payable to an Insurance Company, maturing October 1999, bearing
interest at 6.83%, with monthly payments of $8,622 including
interest.
124 170
Installment notes and capitalized leases collateralized by certain
vehicles, machinery and equipment, maturing at various dates through
September 2000, at interest rates ranging from 3% to 9%.
213 253
------------------ -------------
21,685 16,763
Less current maturities 15,469 1,373
------------------ -------------
Long-term debt $ 6,216 $ 15,390
================== =============
</TABLE>
As of June 30, 1998, the Company was in default under its $10 million note
and $5 million credit facility with PNC Bank (together, the "credit facility").
Pursuant to the terms of the credit facility, the Company covenants to maintain
a net worth of $40 million (on a GAAP basis) at all times after assigning
a value of $5 million to the land on which the Track is located. PNC Bank
has not delivered any notice of such default. The credit facility is
guaranteed by certain shareholders and related parties. The Company is
attempting to negotiate a waiver of this default.
3. Accounts payable-arbitration - Pursuant to the terms of the Company's
construction contract with Norglass, the general contractor engaged to
manage the construction of the Company's racetrack, the Company is
proceeding before the American Arbitration Association ("AAA"). In the
proceeding, the Company is seeking reimbursement for amounts paid directly
to subcontractors as well as elimination of all mechanic liens placed by
Norglass against the Company. Approximately $1.9 million in construction
costs has been included in accounts payable--arbitration at June 30, 1998
and December 31, 1997.
In January 1998, the Company filed a demand for arbitration against
Maryland-Virginia Racing Circuit ("MVRC"), before the Virginia Racing
Commission, which demand was referred to an arbitrator in May 1988. In its
arbitration demand, the Company is challenging a management fee claimed to
be due to MVRC pursuant to a Management and Consulting Agreement dated as
of April 22, 1996. At June 30, 1998 and December 31, 1997, approximately
$1.6 and $.5 million, respectively, has been included in accounts payable -
arbitration.
4. Certain reclassifications have been made in the prior years' financial
statements to conform to the June 30, 1998 presentation.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Overview
Colonial Downs Holdings, Inc. (the "Company") was organized to pursue
opportunities for horse racing and pari-mutuel wagering and holds the only
licenses to own and operate a racetrack and racing centers ("Racing Centers") in
Virginia. The Company currently operates Racing Centers in Chesapeake, Richmond,
Hampton, and Brunswick, and may apply for licenses for up to two additional
Racing Centers if suitable opportunities are identified. In September and
October 1997, the Company completed its inaugural thirty-day thoroughbred live
meet at its newly constructed racetrack (the "Track") located in New Kent
County, Virginia. In addition, the Company recently completed its first
standardbred racing meet which ran from April through July, 1998. The Company's
next thoroughbred meet of twenty-five days will commence September 7, 1998 and
run through October 11, 1998, and will include the inaugural Virginia Derby, a
race for three year old thoroughbreds, on October 3. Then, the Company will
conclude its first full year of live racing in November 1998 by hosting the
Breeders Crown, one of the premier North American standardbred racing events.
Both the Breeders Crown and the Virginia Derby are expected to be televised on
national cable networks.
Results of Operations
The following table presents the major components from the Company's
Consolidated Statements of Earnings (Loss) as a percent of total revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------------- -------------- ------------- ------------
<S> <C>
Revenues:
Pari-mutuel and simulcasting commissions 86.5% 92.7% 90.6% 92.5%
Other 13.5 7.3 9.4 7.5
-------------- -------------- ------------- ------------
Total revenues 100.0 100.0 100.0 100.0
Direct operating expenses:
Purses, fees, and pari-mutuel taxes 42.8 44.5 43.8 45.8
Simulcast and other direct expenses 55.1 37.0 50.9 35.4
Depreciation and amortization 5.7 2.1 6.1 2.0
-------------- -------------- ------------- ------------
Total direct operating expenses 103.6 83.6 100.8 83.2
Selling, general, and administrative expenses 15.0 8.6 12.6 8.4
-------------- -------------- ------------- ------------
Total operating expenses 118.6 92.2 113.4 91.6
-------------- -------------- ------------- ------------
Earnings (loss) from operations (18.6) 7.8 (13.4) 8.4
Interest (expense) income (6.2) 7.3 (6.3) 3.4
-------------- -------------- ------------- ------------
Earnings (loss) before taxes (24.8%) 15.1% (19.7%) 11.8%
================ =============== ============= ============
</TABLE>
<PAGE>
Three months ended June 30, 1998 compared to three months ended June 30, 1997
Total revenues for the second quarter of 1998 amounted to $7.8 million, up $2.8
million (54%) from $5.0 million in the second quarter of 1997. Approximately
$2.0 million of this increase was attributable to the operation of the Hampton
and Brunswick Racing Centers ("Racing Centers") which were not opened until
December 1997. An additional increase of $1.4 million resulted from revenues
generated from the Company's inaugural live harness racing meet, which ran from
April 24 to July 5, 1998. Excluding the impact of the new Racing Centers and the
harness racing meet, total revenues decreased by about $.6 million, primarily
reflecting the anticipated effect of the new Hampton Racing Center on the
existing Chesapeake Racing Center, both of which attract customers from the
Tidewater region. Although revenues from the Chesapeake facility decreased from
the same period of the prior year, the combined operation of the Chesapeake and
Hampton Racing Centers increased revenue in the Tidewater region by
approximately $1.0 million.
Total operating expenses of $9.2 million for the second quarter of 1998
increased $4.6 million (100%) from $4.6 million in the second quarter of 1997.
The increase primarily resulted from both fixed and live racing variable costs
associated with the operation of the Company's racetrack ($3.1 million), which
opened in September 1997, and the operation of the Hampton and Brunswick Racing
Centers ($1.9 million) in the second quarter of 1998 versus no operations in the
same period of the prior year. Additionally, corporate overhead increased
$400,000. Excluding the impact of the Track, the new Racing Centers, and
increased corporate overhead, operating expenses decreased by about $.8 million
compared to the second quarter of 1997. This reduction is primarily due to the
reduction in handle at the Chesapeake Racing Center caused by the opening of the
Hampton Racing Center as well as improved operating efficiencies.
Due to the factors discussed above, the Company incurred a loss from operations
of $1.4 million compared to earnings of $395,000 in the second quarter of 1997.
All Racing Centers with the exception of Brunswick operated at a profit for the
second quarter of 1998. Earnings at the Richmond and Chesapeake Racing Centers
increased by approximately $150,000 compared to the same period of the prior
year. In order to maximize profitability and efficiency at the Brunswick Racing
Center, the facility changed its operating hours from seven days to five days a
week effective April 27, 1998. This change brought the facility close to
breakeven for the last two months of the second quarter.
Other expenses increased to $482,000 in the second quarter of 1998 compared to
income of $368,000 in the same period of the prior year. This change of $850,000
reflects the additional interest expense incurred from increased borrowings by
the Company to complete construction of the Track and Hampton and Brunswick
Racing Centers as well as the treatment of interest as an expense item in the
second quarter of 1998 versus as a capitalizable cost of construction in the
same period of the prior year. In addition, the Company earned interest on the
invested initial public offering proceeds during the same period in 1997.
Six months ended June 30, 1998 compared to six months ended June 30, 1997
Total revenues for the six months of 1998 amounted to $14.5 million, up $4.0
million (39%) from $10.5 million for the six months of 1997. Approximately $4.0
million of this increase was attributable to the operation of the Hampton and
Brunswick Racing Centers which were not opened until December 1997. An
additional increase of $1.4 million resulted from revenues generated from the
Company's inaugural live harness racing meet, and was offset by $1.4 million in
lower revenues at the Richmond and Chesapeake Racing Centers. Although revenues
from the Chesapeake facility decreased from the same period of the prior year,
the combined operation of the Chesapeake and Hampton Racing Centers increased
revenue in the Tidewater region by approximately $1.9 million.
<PAGE>
Total operating expenses of $16.5 million for the six months of 1998 increased
$6.9 million (72%) from $9.6 million in the first six months of 1997. The
increase primarily resulted from both fixed and live racing variable costs
associated with the operation of the Company's racetrack ($4.1 million), which
opened in September 1997, and the operation of the Hampton and Brunswick Racing
Centers ($4.0 million) in the second quarter of 1998 versus no operations in the
same period of the prior year. Additionally, corporate overhead increased
$500,000. Excluding the impact of the Track, the new Racing Centers, and
increased corporate overhead, operating expenses decreased by about $1.7 million
compared to the first half of 1997. This reduction is primarily due to the
reduction in handle at the Chesapeake Racing Center caused by the opening of the
Hampton Racing Center as well as improved operating efficiencies.
Due to the factors discussed above, the Company incurred a loss from operations
of $2.0 million compared to earnings of $873,000 in the first half of 1997. All
Racing Centers with the exception of Brunswick operated at a profit for the
first six months of 1998. Earnings from the Richmond and Chesapeake Racing
Centers increased by approximately $200,000 compared to the same period of the
prior year. Operations at the Brunswick facility have improved since the
operating hours were reduced in late April.
Other expenses increased to $926,000 in the first half of 1998 compared to
income of $355,000 in the same period of the prior year. This change of $1.3
million reflects the additional interest expense incurred from increased
borrowings by the Company to complete construction of the Track and Hampton
and Brunswick Racing Centers as well as the treatment of interest as an expense
item in 1998 versus as a capitalizable cost of construction in the same period
of the prior year. In addition, the Company earned interest on the invested
initial public offering proceeds during the same period in 1997.
Liquidity and Capital Resources.
The Company's primary sources of liquidity and capital resources have been
proceeds from the initial public offering of the Company's stock, long-term
debt, and stockholders loans. As of June 30, 1998, the Company was in default
under its $10 million note and $5 million credit facility with PNC Bank
(together, the "credit facility"). Pursuant to the terms of the credit facility,
the Company covenants to maintain a net worth of $40 million (on a GAAP basis)
at all times after assigning a value of $5 million to the land on which the
Track is located. PNC Bank has not delivered any notice of such default. The
credit facility is guaranteed by certain shareholders and related parties. The
Company is attempting to negotiate a waiver of this default. The Company
believes that its cash on hand, cash generated from operations, a $1 million
loan from a shareholder, and access to other capital and financial resources
will be sufficient to cover its operating expenses and other cash requirements
for 1998.
Net cash used in operating activities totaled $1.3 million for the first six
months of fiscal 1998, representing a $2.9 million decrease from $1.6 million
provided by operating activities in the first half of the prior year. The
decrease primarily reflected the Company's net loss of $2.9 million in the first
half of 1998 versus net earnings of $902,000 in the same period of the prior
year, offset by an increase in depreciation and amortization of $681,000.
Net cash used in investing activities totaled $5.3 million for the six months of
1998 and included property and equipment primarily for the completion of the
Track as well as the Hampton and Brunswick Racing Centers. Investing activities
were comprised of $1.0 million in 1998 capital expenditures and approximately
$4.3 million related to the payment of construction payables accrued at December
31, 1997. Net cash used in investing activities in the first half of 1997
totaled $17.2 million, and reflected higher capital expenditures related to
constructing and preparing the Track for the inaugural live meet in September
1997. The Company anticipates that its capital spending in fiscal 1998 will
approximate $1.3 million.
<PAGE>
Net cash provided by financing activities was $4.9 million for the six months of
1998. The Company borrowed $5 million on its line of credit facility and
financed $287,000 of its insurance premiums. The Company used $4.3 million of
its $5.0 million line of credit facility to pay construction payables related to
the completion of the Track and Hampton and Brunswick Racing Centers as
mentioned above.
The Company is currently assessing the impact of the year 2000 on the processing
of date-sensitive information by the Company's computerized information systems
and products purchased by the Company. The Company believes that its internal
information systems are either year 2000 compliant or will be so prior to the
year 2000 without incurring material costs. There can be no assurance, however,
that the Company will not experience unexpected costs and delays in achieving
year 2000 compliance for its internal information systems and current products,
which could result in a material adverse effect on the Company's future results
of operations.
Forward Looking Statements
This report contains forward-looking statements that inherently involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors. Statements regarding results of operations, the opening of additional
Racing Centers, the Company's expectations, hopes, intentions, beliefs,
strategies,and certain other statements contained in this report are
forward-looking statements and, as such, involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of the Company to be materially different from any
future results, performance, or achievements, expressed or implied by such
forward-looking statements. Such potential risks, uncertainties, and factors
include, but are not limited to, acts by parties outside the control of the
Company, including the Maryland Jockey Club and the Virginia Racing Commission,
political trends, the effects of adverse general economic conditions, and
governmental regulation, including licensing of additional Racing Centers. The
forward-looking statements contained herein speak only as of the date of this
report, and the Company assumes no obligation to update any such forward looking
statements.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Norglass, Inc. Colonial Downs, L.P. (the "Partnership") is engaged in a
contract dispute under the Construction Agreement, dated February 10, 1997 (the
"Construction Contract"), between the Partnership and Norglass, Inc.
("Norglass") the general contractor engaged to manage the construction of
Colonial Downs' racetrack. Pursuant to the terms of the Construction Contract,
the Partnership filed a demand for arbitration with the American Arbitration
Association ("AAA") against Norglass in November, 1997 to resolve its dispute.
In the proceeding, the Partnership challenges the validity of Norglass'
mechanic's liens for approximately $6.5 million and asserts a damage claim
against Norglass in an amount not less than $4.4 million. James Leadbetter, who
owns more than 5% of the Company's outstanding stock, is a shareholder of
Norglass, Inc. Hearings before the arbitration panel are scheduled to commence
prior to the end of the year.
Maryland-Virginia Racing Circuit, Inc. On January 8, 1998, Colonial
Downs filed a demand for arbitration against the Maryland-Virginia Racing
Circuit, Inc. ("MVRC") before the Virginia Racing Commission (the "Commission").
In its arbitration demand, Colonial Downs challenged the management fee claimed
to be due by MVRC pursuant to a Management and Consulting Agreement, dated as of
April 22, 1996 (the "Consulting Agreement"), between Colonial Downs and MVRC.
The arbitration is based upon the fact that the demanded compensation under the
Consulting Agreement has failed to consider certain changed circumstances as
well as the original intent of the parties. Although the Commission initially
declined Colonial Downs' request that it arbitrate the dispute, the Commission
appointed John H. Shenefield, the former chairman of the Commission in May,
1998, as the arbitrator to hear the dispute. The arbitration is proceeding and
is expected to be resolved in the next 60 to 90 days.
Item 3. Defaults Upon Senior Securities
As of June 30, 1998, the Company was in default under its $10
million note and $5 million credit facility with PNC Bank (together,
the "credit facility"). Pursuant to the terms of the credit facility,
the Company covenants to maintain a net worth of $40 million (on a GAAP
basis) at all times after assigning a value of $5 million to the land
on which the Track is located. PNC Bank has not delivered notice of such
default.
As of September 30, 1998, the Company was in default of two
additional covenants under its credit facility with PNC Bank which require
the Company to maintain a ratio of Total Debt to EBITDA of no more than
1.7 to 1 and a ratio of EBITDA to Assumed Debt Service plus Capital
Expenditures of at least 3.5 to 1.
The credit facility is guaranteed by certain shareholders and
related parties. The Company is attempting to negotiate a waiver of the
defaults.
Item 4. Submission of Matter to Vote of Security Holders
The Company held its annual meeting of shareholders on June 5, 1998. At
the meeting, Stephen Peskoff and Patrick J. McKinley were re-elected as
directors to serve for three years. They received the following votes:
<TABLE>
<CAPTION>
Votes Cast For Votes Withheld
-------------- --------------
<S> <C>
Stephen Peskoff 12,033,610 55,630
Patrick J. McKinley 12,044,717 44,680
</TABLE>
In addition, Mr. Robert M. "Sam" Hazelwood was nominated for
consideration as a director by motion of a shareholder. He received 31,697 votes
and was not elected. Messrs. Jeffrey P. Jacobs, Arnold W. Stansley, Robert H.
Hughes, William J. Koslo, Jr., and David C. Grunenwald continue to serve as
directors of the Company.
No other matters were voted upon by the shareholders.
<PAGE>
Item 5. Other Information
An affiliate of the Company's Chairman, President and Chief Executive Officer
has agreed to loan the Company $1,000,000. The loan will have a term of one year
and bear interest at 8.50% payable upon maturity. The principal and accrued
interest are convertible into Class A and Class B common shares of the Company
at a conversion price of $1.625 per share.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit:
Exhibit Description
Exhibit 27 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Colonial Downs Holdings, Inc.
Date: October 1, 1998 /s/ Ian M. Stewart
------------------
Ian M. Stewart, Vice President, Chief
Operating Officer and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheets and Consolidated Statements of Earnings
(Loss) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
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